Taking a Look at Our Retirement

This week I have been trying to take a long-term look at our finances by peering into the abyss that is retirement when we are 65-years old. It’s a scary undertaking because there are so many unknowns.

In order to look at these numbers, I had to establish some parameters:

• Desired annual income: $100,000 ($222,000 at age 65). We could do with less but we are comfortable with this amount. Some of our bills will be gone (mortgage) but others will pop up (healthcare). I’d rather be safe than sorry so I’m estimating a higher income amount.

• The latest Social Security statement says that our monthly benefit at age 62 is around $2,500, which is not adjusted for inflation. I adjusted the amount for an inflation rate of 3% and came up with $5,700, which I then halved due to the uncertainty with the social security program. That gave me an annual figure of around $34,000.

• My wife has a pension plan. The latest statement says that she could expect a monthly benefit of $2,117 at age 65. I’m not too familiar with this plan but I assume that this number will increase over the years. However, to be conservative, I’ll stick with the $2,117 amount ($25,000 per year).

• That leaves $163,000 per year that must be funded via retirement plans (401(k) and IRAs). At a 4% withdrawal rate, the amount of capital needed to fund $163,000 in income is roughly $4,000,000. That’s a lot of money but it also assumes that the principal doesn’t diminish over the years.

• At our current pace (assuming a 9% rate of return), we should have more than enough to meet that goal. If I assume a 7% rate of return, we’ll have a significant shortfall. But, these numbers are misleading in that they do not reflect raises or profit sharing that goes into the 401(k) on an annual basis.

Yes, there are things to consider. For instance, I used a 3% inflation rate. If inflation runs 4% to 5%, my numbers will change dramatically. Social security could be phased out for those who are deemed “wealthy” by the government’s standards, which would be bad news considering how much money my wife and I have paid into the system already at this point in our lives. But, those things could be offset by saving more money and using principal throughout retirement.

I’ll run some more scenarios in the future to show you what I’m talking about.

16 thoughts on “Taking a Look at Our Retirement”

  1. Just doing a quick back-of-the-envelope calculations for myself. I’d need about half my current income in retirement than what I make today (keeping lifestyle constant).

    I spend about half my current income on my mortgages (only debt), retirement and other savings (like college funds), and higher taxes. In retirement, all those will be either eliminated (savings and mortgages) or reduced (taxes due to a lower income).

    I don’t think my medical expenses will go up from where I’m currently at (just inflation adjustments) since I already spend a ton.

    No pension and no SS, and I still should be good to go — barring any major financial disaster between now and 30 years from now. I am not counting on SS in my retirement plans — if I get SS benefits, then great, if not, well I’m a pessimist and I am planning for that contingency.

    If your numbers aren’t looking good, then save more money now (reduce current lifestyle), postpone retirement a few years, or expect to adjust to a lower lifestyle in retirement.

  2. Hi – Call me a pessimist, but I suspect if you have in the realm of $2-$4 million, you will never see a cent of Soc Sec. I believe means tests, or something similar, are coming. And those of us that live frugally to save for our retirements will be rewarded by losing out on our Soc Sec benefits. Hope I’m wrong, but the government has bills to pay, and can’t seem to stop spending.

  3. Couldnt agree more with what clock said, i definitely dont think someone with 2-4 million in the bank will be getting any social security payments. In my case, as I am still in my 20’s, im not expecting to get any payments when i retire, which is a shame since I do already pay into the system. Hopefully our congress can figure something out in the near future to save and fix this vital program for millions of seniors in this country.

  4. Don’t forget taxes. Taxes will never again be as low as they are now. If you even come close to your savings goals, you will not be in a lower tax bracket when you retire. I would only use Roth retirement plans.

    Social Security will be means-tested. If you meet your savings goals, you will get little or nothing from SS.

    A 9% return is too optimistic. I would plan for no more than 2%-3% over inflation.

  5. JohnB) it is very hard to save enough to put yourself into a higher tax bracket in retirement.

    The vast majority of retirees are in a lower bracket during retirement, than they were in their working years, and I expect the same for myself.

    “Taxes will never again be as low as they are now.” — if you are rich, then that statement is true.

  6. @BG, I agree it will be hard to get in a higher bracket in retirement. That being said, my strategy is similar to JohnB (using mostly Roth accounts).
    I think taxes will be higher by the time I retire. I’m also at the relative beginning of my career and plan to add substantially to my yearly income over the next 20+ years of working.

    My goal at retirement is to replace 85% of my salary with earnings from investments. If all works out as planned, I’ll be able to increase my standard of living in retirement. That’s the plan, but of course, a lot can change in 20+ years.

  7. Dan) I’d go with a Roth in a certain case. Such as, use 401k-traditional to push taxable income down into a lower bracket, and them make Roth contributions (pay taxes) in that lower bracket.

    For example: if I was in the 25% MFJ bracket, it would be ideal to use 401k or tIRA just enough to bring the taxable income down into the 15% bracket. Then invest the rest into a Roth IRA (or Roth 401k) — you’d only be paying the 15% tax for the Roth contributions.

    Since there is a huge difference between 15% and 25%, it is important to calculate when your income is close to that line (MFJ: $82k-$93k, Single: $40k-$48k).

    If you are near the bottom of your bracket, but too high to do the straddle trick, then just go with traditional 401k/IRA — since the brackets are really wide, hence unlikely you’d move into the higher one at retirement which would take an extra $50k (or so) a year in income to get there.

    If you are close to the top of your bracket, then you may want to go with some Roths (not a lot) as your odds increase that you may actually be in a higher bracket at retirement (if you are saving a lot).

    Either way, invest enough in traditional 401k/IRA to cover the standard deduction & personal exemptions (0%), and the lower brackets (10%, etc) in retirement. Since I’m in the 25% bracket right now, I’m going with traditional for money targeted at the 0%, 10%, and 15% brackets in retirement (that is a no-brainer). For the money targeted at the future 25% bracket, it might make sense for me to dabble in Roths to fill _some_ of that (as a hedge against future tax increases).

    So, optimally for me I’d be in the ball-park of: 90-96% Traditional, 5-10% Roth. I can’t really envision a scenario where someone would want to have more Roth than traditional though.

    If someone could explain a scenario where you’d want more Roth than Traditional, I’d love to hear it!

  8. Why not just lower your expenses? It sounds like you have high expectations for your expenses if you are counting on 163K annual income. Yes, health care will be expensive but that’s what insurance is for. Do you have long-term care insurance?

    That may lower your expenses the twilight of your years. I am just curious because it turned out my grandparents actually did better in retirement than they thought, and that’s considering they retired nearly 30 years ago. They did not even need as much as they thought they would need.

  9. #10 Double MNW) That $163k is inflation-adjusted dollars not already covered by conservative pensions, SS, etc — which is about $74k in today’s dollars. Add in the $15k for SS, $11k for the pension and you’ll hit the $100k (today’s dollars) that JLP wants to get to.

    For myself, if I got 75% current income in retirement, I’ll be real happy.

  10. Question…

    Would you rather they do a means test to determine whether or not you collect SS in retirement?


    Eliminate the wage cap such that those making over 107k or whatever it is pay the same percentage as those making under?

    Just a question.

    Also, you didn’t say how close you are to your 4 million goal and what percentage of that total is in stocks / bonds / cash / other. Would be interesting to see. It’s comforting and/or scary to be able to compare yourself to someone else’s snapshot.

  11. What did you mean in the beginning about the SSI – when you said “our monthly benefit at age 62 is around $2,500, which is not adjusted for inflation. I adjusted the amount for an inflation rate of 3% and came up with $5,700” Can you show us the math on that.. How did you go from $2500 to $5700 by adjusting for inflation at a rate of 3%…

  12. I figured 2-3 million would be a good target for us. You’re younger than we are…now I’m scared. Not just b/c our # s/b higher, but we’re not where we s/b at this point.

    So…we’re now taking boarders in IL!!!

  13. JLP, you are being VERY optimistic if you think social security will be around in 20 or 30 years (at least in its present form). I would count on nothing.

    Also, I would allocate some income at 65 years old; I mean in good health you can work until you are 75 or older. Maybe not necessarily 50 to 60 hours a week, but 2-3 days/ week generating 20% to 40% of your income would likely lower your capital needs a lot that late in life.

    I plan on having my parents and spouse’s parents live w/ us or close to us when they get medically necessary. Hopefully this will save some of their money and give us the opportunity to care for them like they cared for us when we were children.

    Likewise, I want to teach my children this, so that if and when I’m/we’re old like that, they can take me/us in.

  14. I do think Social Security will be around. But, I do not expect to get what the estimates tell me we should get. That’s why I took their estimates and halved them. Still too high? I don’t know.

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